There is an absurd paradox in US tax. It wisely taxes its citizens on their world wide income without consideration of whether they are resident in the US or not. Despite claims to the contrary, this clearly works well for the US – and those who say otherwise are amongst the easy to find “anti-tax” lobby in the US.

On the other hand it taxes its companies on a completely perverse territorial basis – so that profit earned outside the US is not taxed until remitted from abroad. It is very easy to see the tax avoidance opportunities this paradox creates.

Bush exploited this by allowing in – I think it was 2007 – US corporations to remit funds back to the US at a 5% tax rate for a one off boost in receipts – which did nothing for employment in the US, which was his supposed aim. Now the FT reports:

US multinational companies are clamouring for a tax holiday to repatriate billions of dollars “trapped” overseas but are being rebuffed by Barack Obama’s administration.

JPMorgan research estimates that 30-40 per cent of the almost $1,000bn in cash held by non-financial S&P 500 companies is in foreign jurisdictions.

The answer is very obvious: the US needs to reform its basis for determining tax residence for corporations – and tax them on their world wide income. As is obvious from this demand, any other option gives rise to abuse.

Which is exactly why the UK is wrong to be relaxing this approach.

On the other hand – the UK also needs to reform its basis for determining tax residence for companies. The rule based on the location of central management, focussing on the board meeting is absurd and so easily abused it is well over due for reform.

14 Responses to “Time to reform US tax – not give amnesties”

I can’t see what’s wrong with their corporate tax regime. The UK’s seems to go one better – didn’t finance act 2009 introduce a rule that allows uk companies to remit dividends from overseas subsidiaries tax free? Thus making the UK a fantastic jurisdiction in which to base a multinational holding company. And they’re not the only ones – Belgium, Netherlands spring to mind also

It is true that the UK to introduce an allowance that dividends can be paid tax-free from overseas subsidiaries, but only when those subsidiaries undertake real trade in real places which is acceptable to HM revenue and Customs. It is very unlikely that many tax haven subsidiaries will get away with paying such dividends tax-free and they will, instead, the caught by new controlled foreign company rules which is exactly why some companies are leaving the UK

in other words, the UK is recognising the validity of taxation where the substance of transactions is real whilst seeking to tackle tax abuse – which is something I’ve also tried to do with my proposal for a passport based tax, published over the weekend, which is exactly why I suspect that they will adopted sometime in the future

“[The US] wisely taxes its citizens on their world wide income without consideration of whether they are resident in the US or not.”

Citizenship based taxation is not wise. All analysts conclude that it uniquely damages US national interests, as well as the job prospects of US citizens seeking employment outside of the US. The President’s own Export Council regularly calls on congress to repeal this law.

It does not work for individuals, and it will similarly not work for corporations. Such a regime will encourage businesses to move completely overseas, in the same way as individuals renounce US citizenship to free themselves of the obligation to pay US taxes. Three times as many people renounced US citizenship in 2009 as in 2008. There is now a year or more waiting list at some US embassies for US citizens wishing to renounce.

“The answer is very obvious: the US needs to reform its basis for determining tax residence for corporations – and tax them on their world wide income. As is obvious from this demand, any other option gives rise to abuse.”

How does this square with your desire for country-by-country reporting? It is simply not possible to advocate C-by-C reporting and at the same time advocate corporate tax on worldwide income.

I have to say that one of the most frustrating things of living overseas was completing two sets of tax returns.

The US policy of global taxation is one reason why my wife has not applied for US Citizenship. Just in case we move out of the US again, we at least have options concerning ownership of assets in the US. Just an example of how tax law effects human behavior.

…in the same way as individuals renounce US citizenship to free themselves of the obligation to pay US taxes. Three times as many people renounced US citizenship in 2009 as in 2008. There is now a year or more waiting list at some US embassies for US citizens wishing to renounce.

You are only partially right unfortunately.

Many US citizens renounce their citizenship just to rid themselves of the hassle, and the often considerable expense, of having to file a tax return. Almost no overseas citizen ever pays any US tax. The only beneficiaries of this policy are the army of tax advisors and accountants that will charge you a few hundred bucks to prepare these impossibly complicated forms.

“It [the US] wisely taxes its citizens on their world wide income without consideration of whether they are resident in the US or not.”

I find it hard to agree with you. Pretty much all US citizens living in the UK ought to file tax return. The limits at which you need to file in the US are very low. A single person with income over $9,350 (around £6,000) needs to file. A married couple with a joint income of $18,700 (c£12,000). Needs to file a tax return. This means that if you are working full time in the UK on the minimum wage you would be required to file a US tax return.

The US tax code is complex. Many – perhaps most – people, even those with fairly straight forward affairs will need professional help to prepare their US tax return correctly.

The cost of a professional help is not likely to be less than £200 even for the most straight forward return – like the individual on the minimum wage.

In addition there are numerous traps and pitfalls which can catch one by surprise. Not just sophisticated high net worth individuals, but regular ordinary people.

Putting money into an ISA – think again – US tax law doesn’t recognise them.

Investing in a non US investment trust – be careful, its a passive foreign investment company (PFIC). Quite complex – nasty US tax consequences.

Selling your (only) home in the UK – you could easily end up paying tax in the US on the gain.

All this even for people on average incomes and even for people living in the UK – which has a higher burden of taxation that the US.

On top of all this many Americans in the UK seem to be in ignorance of their obligation. I get regular calls from Americans looking for help because they have just found out that they should have been filing tax returns for the last few years.

What is the upshot of this? Apparently massive non-compliance. Apparently (see http://www.ustaxonline.com/vodcast.html watch the video its near the start) of the 7 million US citizens living abroad only 6.6% actually file a US tax return.

I don’t know what percentage should file – my guess is well over half.

Does a system where the overwhelming majority make no attempt to comply really “work well”. I don’t think so.

Your proposals that the UK should effectively retain the right to tax UK nationals living in tax havens is an interesting one. But the current US system of worldwide taxation of its citizens seems to me to be both onerous and unfair.

“Your proposals that the UK should effectively retain the right to tax UK nationals living in tax havens is an interesting one. But the current US system of worldwide taxation of its citizens seems to me to be both onerous and unfair.”

And you fail to note that I am not promoting the US system

Those living in “white states” would just need to say so

And that would be the end of their obligation

That’s not onerous

And compliance would be easy

So don’t create straw men that are not there to oppose something which is not just desirable but necessary – which is the protection of UK revenue from abuse form tax havens – often by UK citizens

‚Ä¶in the same way as individuals renounce US citizenship to free themselves of the obligation to pay US taxes. Three times as many people renounced US citizenship in 2009 as in 2008. There is now a year or more waiting list at some US embassies for US citizens wishing to renounce.

You are only partially right unfortunately.
Many US citizens renounce their citizenship just to rid themselves of the hassle, and the often considerable expense, of having to file a tax return. Almost no overseas citizen ever pays any US tax. The only beneficiaries of this policy are the army of tax advisors and accountants that will charge you a few hundred bucks to prepare these impossibly complicated forms.

Wrong.

There are certainly cases where US citizens abroad pay US tax on their non-US income. The FEIE only covers the first $90k or so of income, so anything after that the US will seek to tax. When this occurs it is possible to instead take a credit for US tax against foreign taxes paid. But, this credit is insufficient to wipe out the US tax due where the foreign tax rate is lower than that of the US. Many European and Asian countries fall into this category.

As if that were not bad enough, the US generally does not allow the same tax reliefs as other nations. For example, a US citizen living and working in the UK would face no UK tax on cash ISA interest, lottery winnings, the premium bonds, or a cake won at the local school raffle. The US, though, would demand tax on all of these. And the UK has a tax treaty with the US — US citizens living in non-treaty countries have it even worse.

Finally, the US has in place a huge “reporting requirement” for all of this, with the result that even if you do not owe any US tax at all, failing to report to them that you do no can cost you 50% of your total assets for each year you miss filing a form.

Given all of this, I’m unsure why anyone would want to wish the same on UK citizens.

John, I know first-hand about the pains of being a US taxpayer abroad.

I also know that the differences in tax regimes between the US and many European countries have some weird and unwelcome consequences: we once got taxed during a mortgage refi; we were rolling-over the same amount in foregin currency, but because the Dollar had appreciated from the time when the initial mortgage had been written, we were going to be taxed on the reduction (measured in Dollars) of our mortgage liability. We avoided this by taking the new mortgage under my name alone.

What I really wanted to say is that overall, the revenues raised from overseas citizens are marginal. But the cost of compliance is significant, and frankly unnecessary.

Sounds easy, but it will be quite complicated in practice. How do you define “living” in a white state? Who is going to verify that one actually “lives” there, or how will one prove to HMRC that he/she lives in that country?

What if one moves to Ireland or Switzerland, both white sates, and file there as non-doms or under the forfait regime? Or moves to Israel (presumably white-state as well) which has just announced 20-year tax breaks on foreign income?

Not saying it is a bad idea, but one can easily under-estimate the complexities involved.